Reserve Studies Required - Reserve Funds
The purpose of a reserve fund is to have funds available to repair, replace, restore, or maintain the major common area components. The reserve study process can be summarized as follows:
- A reserve study provider is retained by the board to identify all major common area components, the cost to repair or replace them, and to estimate their remaining useful life.
- The company calculates how much money is needed and when, creating a cash flow projection.
- The board decides how to fund the reserves. This can be through increased assessment contributions, special assessments or a combination.
- The funding plan is annually disclosed to the membership in the year-end budgeting process.
Associations, regardless of size, are required to prepare a reserve study unless the total replacement costs are less than 50% of the annual gross budget of the association, excluding the association’s reserve account for that period.
At least once every three years, the board of directors shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain. A reserve study is not a “study” of the roofs, pipes, streets and other common area components. It is a list of the major common area components with an estimate of their remaining useful life. Reserve studies should be done by someone who has the required expertise.
Allocations in reserve studies are projections and subject to revision annually as components wear out at their differing rates. As a result, boards must review the reserve study, or cause it to be reviewed, annually and then implement appropriate adjustments.
Small residential associations, even as small as two units, must perform reserve studies if they have common areas unless the total replacement costs are less than 50% of the annual gross budget.
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